Quarterly taxes for physician independent contracting/moonlighting work

[joh04643]

Hello, 

I am physician and perform independent contracting/moonlighting work in addition to my main employment role. Through my contracting work, I receive a 1099-NEC (not a W2), and as a result, have been recommended to file quarterly taxes. I am wondering how best to go about this process in terms of estimating the amount of quarterly taxes to be paid (given that the amount of contracting shifts I perform each quarter can vary). 

Thank you!

[Bsch4477]

As a rule of thumb if you pay estimated tax of about 30% of your net self employment income you will be OK. Base the payment on your net income from the previous quarter. 

[joh04643]

Thank you for your response. To clarify - this payment would only be based on my net self employment income (not including the income from the employer for which I receive a W2). How are quarters defined? And if quarterly estimates are incorrect (over or under paid), how is this addressed when filing annual taxes?

[Bsch4477]

https://www.irs.gov/faqs/estimated-tax

Your self employment income is taxed in two ways. It is added to your other income and taxed at your marginal tax rate and also 15.3% as self employment tax. Any under or over payment is reconciled on your tax return. 

[joh04643]

Great, thank you for clarifying. One other question. Instead of paying quarterly taxes, could an alternative method be to set aside 30% of each quarterly income aside to pay at the time of the annual tax return, or would this not be recommended?

[Bsch4477]

No. Tax is on a pay as you go system. Otherwise no one would pay taxes until the end of the year and the government would have no money until then. You will have a penalty if you underpay per quarter. 

[joh04643]

Ok, thank you for clarifying. Is it safe to say that with paying the 30% per quarter, you avoid the risk of underpaying and being penalized?

[VolvoGirl]

That's probably enough.  For a underpayment Penalty, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

[Bsch4477]

Yes. 

[kwallace4]

It might help to detail this estimate of 30% out just a bit so you can adjust the number for your particular situation, if needed.  This approximation comes from the following rates:

1) SECA tax of 6.2% Social Security employee portion and 6.2% employer portion - total 12.4% plus

2) SECA tax of 1.45% Medicare employee portion and 1.45% employer portion - total 2.9%

3) Federal tax marginal rate on the low end of 12%.

So the total here is 15.3% SECA tax plus 12% income tax - total 27.3%.  Notice that it doesn't take into account higher marginal tax rates  such as 22%, 24%, 32%, 35% and 37%.  It's up to you to adjust your estimate for your own marginal tax rate (tax braket) and you can use this tool to help with that estimate (look for taxcaster). 

It also doesn't take into account state income tax if you have one.  Some states will penalize you for not pre-paying quarterly just like the Federal Govt and some do not.  Either way, these are two separate payments which can be done electronically.  This is for the IRS:   https://www.irs.gov/payments.

This estimate also does not account for any other payments you may have such as withholding from a W2 job or from other types of income and credits for which you may be eligible (EITC, CTC, AOTC etc). 

Also, it's up to you to calculate your NET self-employment income as you will likely have expenses against the gross income.  Not always, but usually, so the the net effect is less tax.   So take the tax rates discussed above and multiple against your net income.  You can look at your prior year return and get some idea if there are any credits again this year if the same situation and income levels apply. 

Finally, keep in mind the following guard rails as to who must make estimated tax payments in general per the IRS:

"Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments if:

• they expect to owe at least $1,000 when they file their tax return.
• they owed tax in the prior year."

The safe harbor for underpayment penalty is paying in this year at least 100% of the prior year (110% if you make over $150K) or 90% of the current year.  

It's always a good idea to prepay tax on expected income so you have withholding on all of your earnings and are left in a sold refund position rather than owing.  It's not a happy surprise to have penalties and interest on a tax due balance if you estimate wrong. 

[joh04643]

Thank you so much for the breakdown of the 30% estimate. In reviewing your comments, I am now thinking I need to pay more than 30% (37.3%) due to the fact that my tax bracket is 22%. My state (WA) does not have a state income. However, I do have another W2-withholding job and last year had ~$4,000 in self-employment expenses/deductions. With these factors in mind, would 30% once again be a safe estimate?